Reference no: EM133016272

QUESTION - a) Sync Diamonds makes synthetic diamonds by treating carbon in a very technologically advanced and secret process. Each diamond can sell for R100.

The material cost for a diamond is R40. The fixed costs incurred each year for factory upkeep and administrative expenses are R200 000. The machinery costs R1 million and it is depreciated straight-line over 10 years to a salvage value of zero.

i) What is the accounting break-even level of sales in terms of the number of diamonds sold?

ii) What is the NPV break-even level of sales assuming a tax rate of 35%, a 10-year project life, and a discount rate of 12%?

iii) Would the accounting break-even point in the first year of operation increase or decrease if the machinery were depreciated over a five-year period? Motivate your answer.

iv) Would the NPV break-even point increase or decrease if the machinery were depreciated over a five-year period? Motivate your answer.

b) Bokke's management anticipates that, after five years of paying a constant dividend of R2 per year, they will be able to secure new markets. Management thus feels that, commencing with the dividend in year 6, dividends should grow at a rate of 20% per annum for two years (i.e., in years 6 and 7); then there should be 18% growth for one year (i.e., in year 8), settling down thereafter to a constant growth of 10% per annum indefinitely. The required return has increased to 20% per annum. Calculate the price of Bokke's shares today.